The Motley Fool

Australia’s digital economy set to take off

The digital economy’s most important international event for Australia is on at Sydney this week, and a range of companies look to showcase their latest business technology products and innovations. Australia’s largest business event, Cebit 2013, brings together high-tech digital businesses, information technology entrepreneurs and the public sector in its official partnership with the New South Wales government.

The digital future represents productivity increases and economic growth. This in turn represents opportunity for willing investors. The latest cloud technology was hot on the agenda Wednesday, as companies sought to promote their capabilities in what was the largest-ever cloud event in Australia.

Cloud services involve the delivery of data storage, infrastructure, applications and software services online rather than through local data servers. Improved efficiencies bring multiple benefits for businesses of all sizes. Cloud technology has moved from a trend to a business requirement in the past year and the expansion of the technology is set to continue.

Described as the most important technology change since the personal computer and the next stage in the Internet’s evolution, the potential for cloud technology took centre stage at the conference. Two ASX-listed companies that continue to cash in on the cloud are M2 Telecommunications (ASX: MTU) and TPG Telecommunications (ASX: TPM).

Both companies have pursued aggressive growth strategies through acquisitions in the past and continue to grow yearly earnings at impressive rates. At today’s price, M2 Telecommunications is trading on a multiple a little under 16 times forecast earnings compared to TPG Telecom at 19 times forecast earnings. Not exactly cheap, but historical performance suggests both of these companies can take advantage of the shift to the cloud.

Both stocks have outperformed the market in 2013 and a recent dip in valuations may represent a buying opportunity. Long-term investors should look to ride out any short-term volatility as both companies grow earnings.

The market is competitive, though, and iiNet (ASX: IIN) is the other mid-sized player looking to increase its share of the cloud market. Similar in size by market cap to M2 Telecommunications, it too trades on a price to earnings ratio of a little less than 16, and has seen its share price grow over 80% in the past year.

Other companies involved in cyber-security, payment processing innovations and the implementation of the National Broadband Network were all represented at the conference and have equal opportunity to grow their businesses.

Foolish takeaway

The transformative effects of the digital economy will be many and profound. A whole new layer of infrastructure will be required to support the government-backed digital economy, and over the long-term companies that can capitalise on this are perfectly positioned to outperform the market.

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Motley Fool contributor Tom Richardson owns shares in M2 Telecommunication and iiNet.

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